Capital Flight and Bitcoin Regulation

This paper studies the risk of Bitcoin being used for the purpose of capital flight. We propose a new indicator, the bitcoin-implied exchange rate discount, to identify empirically capital flight via Bitcoin. Using data from the two largest bitcoin exchanges in the world during our sample period, BTC China and Bitstamp, we find strong evidence of capital flight from the Chinese Renminbi to the US Dollar via Bitcoin before the People's Bank of China, China's central bank, announced its regulatory policy on December 5, 2013, while the evidence displays no trace of capital flight after the announcement. The People's Bank of China's Bitcoin restriction policy successfully halts the illicit capital outflow via Bitcoin, thereby providing valuable policy implications for government regulation on Bitcoin, as well as on other virtual currencies.